I have been thinking about taking a position in Smart Parking for the last couple of months. I think among private investors looking to beat the market via small cap stocks it has been a bit of a darling in 2024. The management seem reasoanble and its financials are pretty solid. I found the presentations on Strawman quite insightful in this regard.

But there was just something that was gnawing at the back of my mind about this company and why I couldn't pull the trigger on it. This will sound absurd, but I think my reservations about this company are that I just philosophically don't like the business model, it is essentially collecting fines for various companies. And I understand the other side to that equation, for society to function car spots have to be available. Imposing restrictions and fines on people is about as strong an incentive as it gets to have people move their parked car. But I couldn't shake the inherent prejudice (or bias whichever way you want to look at it) I had for the underlying philosophy of the business. Maybe it's because I'm the kind of guy that (irrationally) likes to drive around for additional 5 minutes in order to avoid paying for parking in the first place, I don't know.

But then I had another thought.

I am not a professional investor. I am private individual that invests the majority of my real life funds in index funds. To the extent I am investing in individual stocks, and small caps at that, I am really playing a much riskier game. And in order for the risks I take to be worth it, the pay-off has to be significant. And as my Dad used to say, "the only rich guy I ever knew told me one thing, you get rich slowly, son". And so the time horizon for those significant profits to materalise is going to be decades. When you broaden out your time horizon, the financials of the business are important. The daily charts have a place, I am not knocking technical analysis or even short-term fundamental analysis. But implicit in your investment is an overall thesis about where society and the particular sector you are investing into is going. This is why I have come to believe that investing requires a large degree of humility to admit that luck plays a significant role as nobody can predict the future.

And as Lenin said, "there are decades where nothin happens and week where decades happen". And so the question I have about this business, particularly if it's based in UK cities, is whether the use of carparks is going to increase overtime. I have been (and remain to be fair) very sceptical about the driverless car movement. But in recent weeks, you'd have to have been living under a rock to not see the prevalance of these things increasing. My instagram feed is full of people I know test driving these cars in the US etc. And while I will support arguments about people always wanting to own their own car, their specific car and needing to park etc. I do feel investing in something as simple as car par collection fees for the long-term is asking for trouble. That's not to say people won't see decent capital returns in the next 2-5 years potentially and so if that's your time horizon, who am I to stop you. But if you are more of the 'coffee can', 20+ year time horizon investor, I would question whether this business is for you.

For those reasons I've held off investing even though the fundamentals and the short-term looks to be pretty positive.

@mikebrisy @Noddy74 @GazD some good thoughts already. My take: FY24 was yet another good year. Money where my mouth is: this company is by far my largest holding in my satellite portfolio (reflected on Strawman too – although my RL weighting is slightly higher). Are you insane, you ask? A weighting of 20%?! Perhaps, but my knowledge and conviction has continued to grow over a number of years, and in that time I have grown to appreciate management and their growth strategy. I have also become more comfortable with a significant weighting. That doesn't mean there aren't risks; there are several. But their journey reminds me somewhat of Codan – management recognised their reliance on the UK market (in Codan’s case, their detector biz) and in response moved to diversify operations to other markets. But they are doing this in a measured way and are choosing markets where the risks (as seen in the UK and AU) are much reduced. This theme continued in FY24 – UK obviously remains a massive part of their business (78% of total sites) but this is a reduction on last year’s 84% – and that’s with the Qld market currently paused! I forecast further reductions to this figure in FY25 as the business continues to grow in other markets.

Main highlights:

• Revenue up 21% YoY
• Total sites increased 28%, a combination of organic and acquisition growth.
• Cash flow from operating activities at 13.5m, up from FY23s 9.2m – a 46% increase.
• 12.9m outlay in investing activities – 7.7m on two acquisitions, 4.2m on investment in organic site expansion and 1m in repayments.
• Cash balance remains healthy at 7.2m despite going backwards due to above investment.

In isolation, H2 saw a small improvement to revenue vs H1, while sites under management was much improved. Net profit after tax wasn’t as strong due to a combination of FX movement, tax adjustments and ongoing investment.

Like @Noddy74 suggests, some might look at this result and think 'WTF'. But this is where we are potentially at an advantage against a good portion of the schmucks on HC but also those in the industry that monitor 745 companies. Lift up the bonnet. Overall, FY24 resulted in a strong improvement in earnings, higher cash flows and continued expansion to international operations. Perhaps most pleasing is the ongoing evidence of scaling -- key business costs represented 38% of revenue in FY23, whereas they dropped to 34% in FY4, despite continued expansion. For those that query the competitive advantage for a small mundane parking business, this is it -- the economics and ROE are fantastic and will continue to be so provided management keep their feet on the ground.

The current market cap is just under 190m, with a revenue multiple of 3.5x. In return I am getting ROCE of around 20% and a growing, profitable business with significant runway ahead of it. With the share price where it is, I don't think we are far away from fair value. I plan to update my DCF/valuation in the next 24 hrs.

Key risks remain regulation, particularly the ongoing discussions in the UK, in addition to poorly executed expansion. I anticipate a decent outcome for Smart Parking in the UK, but an unfavourable decision could result in a very ugly short to medium term impact. I don't think this is likely. Agree with @mikebrisy that Qld isn’t critical to the business but remains a nice to have.

So SPZ is being spanked for it's drop in NPAT. It's fallen 13% at time of writing despite:

Increasing revenue 21% year on year.

Really good growth in sites.

Increasing free cash flow.

I am confident in the business so for me this is an opportunity to top up. I just have... Does the increase in costs and drop in NPAT reflect a lack of discipline? To me, it's the cost of a growing business and there will be up years and down years while the business grows. I would expect as the business matures it's larger footprint will smooth some of that out.

The key thing here is I don't see a new regulatory risk which would be a real orange flag.

All of that said, always keen for alternate views.

Up 13% yesterday on volume of $371,823 with no news out. Smells like an insto buying in or adding up.

I don't mind that at all. The current valuation of ~$185M may look a little sharp on a projected ~$5-6M of profit, but under their adjusted EBITDA, which I can accept in their case, it's still reasonable coming in around 12x.

On 13 March, CEO Paul Gillespie sold around 2m shares on-market at roughly A$0.44 cps. This equates to about 25% of his direct individual holding at the time of the trade.

With the share price trading close to all time high levels, I am not too alarmed by this.

Nice little acquisition by smart parking today in the UK sector.

I wonder if this is increased confidence that the UK segment regulation will be favourable or they have struck a deal with a competitor during a moment of concern. Seems like a well priced deal.

held

SPZ results were mixed and the market appears to agree.

Revenue result at $26.7M was ahead of my expectation.

Extra revenue has not resulted in the PBT I was hoping to see as expenses have increased:

Employee expenses up 15%

Depreciation up 24%

Other up 22%

Let's see what they have to say on the call.

Smart Parking yesterday held their AGM and gave a comprehensive trading update (they're also meeting with us on Monday). There was a lot to like. It's a seasonal business and Q1 is usually a good quarter but comps to pcp are relevant and these all looked good. Fines were up 26% versus pcp and up 15% in the mature/not-really-mature UK business. Record revenue. Looks to be gaining operating leverage, although admittedly that is relying on an unaudited adjusted EBITDA number.

Site growth wasn't as rapid as previous quarters but look to have reaccelerated over the past 5-6 weeks to stand at 1193 sites. Even using the quarter end number site growth was 29% higher than pcp and 16% higher in the UK. They brought forward their 1500 site target by 6 months to 31 December 2024 and in so doing continued their happy habit of beating what initially look like aspirational site targets. Importantly the site target is based on organic growth only and so is likely now a conservative target.

When I've spoken to them in the past they think at 1500 sites they're a $70-75 million revenue company, generating $22-25 million EBITDA. That seems about right at the topline, although I'm not modelling quite so much to fall to EBITDA and hoping to get a pleasant surprise. But 1500 sites is just the start. When you consider there are 140,000 sites just in the territories they operate in, you start to get an idea of how long the runway is.

They spoke at length about wanting to move into new territories. I like the way they go about this. They prepare the ground by mentioning it to shareholders without a lot of detail. Six to 12 months later they're getting more specific about where they're focus is (Europe and the US). They talk about not biting off more than they can chew and just moving into one territory at a time. They talk about learning from the Queensland sojourn and focusing on territories that not only allow third party access to licensing information, but also have a code of practice or similar legislation in place. All good things in my view.

The negatives? They're all regulatory. It doesn't sound like there has been much movement on the Queensland side of things. That's not all that surprising given how negatively the government came out against the industry. Their best bet may be a change of government next year, which the polls suggest is likely. In the UK the government is considering submissions to its proposed new legislation and is not expected to give its verdict for at least six months. On the plus side that means a longer period of status quo, but on the downside the dark clouds loom for longer.

There's a good-ish argument that a microcap that has been a microcap for many years will always stay a microcap. I've said similar things in the past, particularly when you have the same people in charge. There's also an argument that change doesn't happen overnight and takes longer and will be harder than you first envisage. Smart Parking is evidence for the latter argument. Current CEO Paul Gillespie took the reigns in FY13 when revenue was $20.6 million. In FY21 revenue was...$20.6 million*. Roll forward two years to FY23 and revenue was $45.2 million and the momentum appears to be continuing. It's not vain growth either - they're increasingly profitable and cash generating. Sometimes it just takes time to get things humming.

[Held]

*admittedly COVID impacted but let's not the truth get in the way of a good story

Another excellent year for Smart Parking with all key metrics moving in the direction we want to see. Revenue came in slightly ahead of my forecast, but perhaps most impressively net income was double what I forecasted, primarily due to gross margin increasing.

Highlights

• Revenue of 45.1m, an increase of 21%, above my forecast of 43m
• Cash inflow of 9.2m, just below my forecast of 10.5m
• Adjusted EBITDA 11.5m, up 35%
• Adjusted EBITDA margin, up 25.5%
• Net income of 6.7m, around double my forecast of 3.3m
• Sites under management (the estate) grew 33% from 839 to 1112. This is a CAGR of 31% since 2018.
• More than 800k spent on share buybacks during the year – 3m shares – at an average price of 0.22c.
• Cash of 10.7m – bloody impressive considering a recent acquisition, continued investment in Germany and share buy backs throughout the year.
• New Zealand deserves a special mention – sites increased to 84 (320% pcp) growth in breach notices increased 258%, with revenue just under 3m – noting all are off a low base this is really impressive for what is still a reasonably new market.
• Qld market remains in a holding state pending a review around regulation.
• 1.3m debt – manageable and not a concern.   

Re: their expansion into Germany – this remains in capex/investment stage. In the call management indicated they are starting to invest more aggressively in this market due to the opportunities/pipeline and large area they can cover. Will be interesting what lies ahead for Germany in FY24; this has the potential to be a hugely profitable market for Smart Parking.  

To elaborate on the increase in gross margin, this is the result of new sites following the initial period of investment – a great example of operating leverage, demonstrating just how attractive this business model is when operating under a regulative-friendly framework.

Outlook

• Unless I misheard, re: new sites under management from the recent German acquisition – they are hoping to convert 2/3 of these to ANPR technology.  
• Some interesting discussion around regulation in the UK on the call, specifically the establishment of a code of practice which remains ongoing. They don't expect any decision in FY24. This is by far and away SPZ's key market, and any regulation changes will have a significant impact (positive or negative) on the business. Management did emphasise that this is very different to Qld – UK is more concerned with establishing a code of practice to govern those that already exist; they are far more open to parking regulation and the requirement/reason for operators to function (unlike Qld which removed the ability of parking operators to access data altogether). Both NZ and Germany for instance already have established a code of practice, but this remains one to watch closely and is a key risk for the business. @Noddy74 @Wini @Byrnesty and others -- anything else to add that I missed or any disagreements?
• They will continue to focus on growth in core markets moving into FY24 – UK, Germany and NZ – both through organic growth and attractive acquisition opportunities.
• During the call management mentioned they are looking to enter new markets in FY24 (most likely in northern Europe) – but have lots of work to do and still in the research stage. They note they need to find the right leader, people and market and need to get that right – refreshing to hear but they need to be cautious not to overdo it, particularly with lots of work to do in Germany and plenty of growth ahead of them still in NZ, the UK and to a lesser extent Australia. This is another risk; we don’t want them biting off more than they can chew, particularly with the business currently performing so well.

I will update my valuation in the coming days – @Byrnesty with operating leverage starting to come through and net income coming in much higher than I expected, I am guessing my DCF will reflect an increased company value. I still think a large discount is required until we know more about the regulation risks in the UK.

Just got back from a Mauritian beach yesterday and catching up on a few updates and the like. Smart Parking delivered not the worst update of the pack. For these guys it's all about sites under management - what they call "the estate". Sites are up 13% on the previous quarter to 1043 (up 24% YoY) and they remain on track for their 1500 site target by the end of FY25. I imagine we'll see a new target in the next 12 months for FY27 or FY28.

Currency is a headwind given they make most of their money in the UK, but their cost base is largely overseas too so forms a natural hedge. They present an Adjusted EBITDA number, which excludes Germany's setup costs. I imagine this irits some people but they are transparent about the amount they're excluding and it is useful to know what the German investment is so I'm ok with it on balance. For what it's worth Adjusted EBITDA is $8.5m Q3 YTD ($8.9m in constant currency). This excludes $1.2m of Germany's costs. EBITDA grew slower in Q3 but it's traditionally a quieter period, with the current quarter being the bigger maker of bank.

On a regional front the UK is still the engine room and despite being the most mature region it is still growing at a decent clip organically. APAC (really just NZ) appears to continue to be growing rapidly (and profitably) despite the loss of new sales in Queensland. Germany is growing quickly off a low base but not at the speed they had hoped, resulting in some sales team remediation. It's a slightly mixed message as they have also suggested the rampup has been similar to New Zealand at the same stage. Germany remains on watch with the sales intervention hopefully gaining traction in Q4.

Cash on hand is down a little but Q3 is the quietest quarter and it's difficult to make conclusions without knowing how working capital and debt have moved. Overall the thesis remains intact and a key question will be what they do with what I expect will be a growing cash pile. Any dividends they pay would be unfranked so more aggressive buybacks and/or M&A appear to be the more likely options. Not a bad problem to have.

[Held]

Non-Executive Director Fiona Pearse recently bought some shares on market, totalling $38,000. Fiona now holds 783,000 SPZ shares, having previously held 613,000.

Fiona has extensive commercial and financial expertise gained from a long career at global companies BHP and BlueScope Steel. She has had a position on the board since 2019, so she knows the business well.

Always good to see some insider buying following some share price weakness.